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Selling Your LLC? Make Sure You Transfer Your Ownership Interest Correctly

Scott Smith
2 min read
Selling Your LLC? Make Sure You Transfer Your Ownership Interest Correctly

If you want to transfer your ownership interest in an LLC, it’s essential that you have your ducks in a row before moving forward. While transferring an LLC can be a reasonably straightforward process, it’s surprisingly easy for things to get off track. Not understanding the applicable legal requirements can derail potential money-making opportunities or bury you in needless paperwork.

Before you sell your interest in an LLC, check out these three tips for keeping the transaction on the right path.

Related: Do Landlords Need an LLC for Rental Property?

Tip #1 — Identify the Appropriate Type of Transfer Process

Before you can get started with the transaction, you’ll need to determine which transfer process  to follow to achieve your specific goals. If you’re simply changing the LLC’s membership by adding new members or removing current ones, the process is typically a bit simpler.

However, if you’re selling the entire LLC to another party, you should consult with an attorney who has experience buying and selling businesses. This type of transfer process is much more complicated. Unless you’re a specialist yourself, you’ll need the advice of a professional with a solid understanding of the legal and fiscal requirements involved in an acquisition.

Tip #2 — Abide By the Operating Agreement

Typically, LLC members will sign an operating agreement when the entity is formed. An LLC operating agreement is a legally binding contract that dictates how the business will operate and defines specific policies and procedures the LLC members must follow. If your LLC has an operating agreement, you must abide by any buyout provisions or other contract guidelines regarding the transfer of ownership.

Tip #3 – Make Sure You Follow the Laws in Your LLC’s Home State

LLCs are legal entities of the state where they were formed, which means they are subject to that state’s business laws. Every state has its own set of rules on how LLCs must operate, and some of these rules may impact ownership transfer transactions. Before making any changes to your LLC’s ownership structure, make sure you review the relevant legal provisions in your LLC’s home state and make a note of any transfer requirements or restrictions you might be required to follow.

I’d also recommend consulting with an experienced lawyer to help guide you through the process. State LLC laws are complicated, and legal mistakes can be costly. A business attorney can ensure you’re complying with the law in all your transactions.

Related: 6 Ways to Protect Yourself from Negligence & Liability Suits When Starting Out

Bonus Tip — How To Cheaply Transfer Property To an LLC

Since we’re talking about ownership transfers and LLCs, I thought I’d share some related guidance with you. Now that we’ve covered how to transfer ownership OF an LLC, let’s discuss how to transfer ownership TO an LLC.

One issue you may encounter as a real estate investor is transferring title to a property you own personally to an LLC. The majority of mortgages include a “due on sale” provision that can be triggered if you transfer the property directly to the LLC. This means you’ll have to pay off the mortgage in order to change the title.

However, you can easily avoid triggering a due on sale clause by using a land trust instead of a direct transfer. Just follow these three steps:

  1. Purchase the real estate in your own name.
  2. Transfer the title to a land trust.
  3. Incorporate the land trust into your LLC structure.

While the process is relatively straightforward, a real estate lawyer with experience creating land trusts can ensure that everything goes smoothly. Whether you are selling an LLC or transferring personal property to it, make sure you have the professional assistance you need to do it right.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.